How to Use a Personal Loan to Clear Outstanding Credit Card Bills?

Using a personal loan to pay off credit card debt is called debt consolidation. It means you take one loan to pay all your credit card dues. This way, instead of many payments, you have only one payment every month. The new loan may have a lower interest rate, which can help you save money and make it easier to manage your debt.

Here is a breakdown of how to use a personal loan for credit card debt:

1. Assess Your Situation

​If you are struggling with high-interest credit card debt, using a personal loan to consolidate and pay off that debt can be a smart move. This strategy may help you secure a lower interest rate, reduce your monthly payments, and simplify your finances by combining multiple debts into a single loan.

Example:

Guri, a 25-year-old from Bengaluru, had ₹1,00,000 in credit card debt with an annual interest rate of 24%. He was paying ₹5,000 per month, but most of it went toward interest, making it hard to reduce the principal balance. He decided to take a personal loan of ₹1,00,000 at a 12% annual interest rate for 24 months. 

His new monthly payment became ₹4,707; over two years, he would pay approximately ₹12,968 in interest. This is significantly less than the ₹27,000 he would have paid in interest over the same period with his credit card.

By consolidating his debt with a personal loan, Guri reduced his interest rate, lowered his monthly payment, and set a clear timeline to become debt-free.

Read More – She Consolidated ₹7 Lakh in Credit Card Debt & Saved ₹2 Lakh in Interest

However, avoiding accumulating new credit card debt is essential while repaying the personal loan. A personal loan for debt consolidation can be effective if you have a solid repayment plan and commit to responsible financial habits.

2. Shop For A Personal Loan

When you are looking to take a personal loan to pay off your credit card debt, it is important to compare different loan offers. This helps you find the best deal with the lowest interest rate and fees.

Here is a simple table comparing three loan offers:

In this example, Lender A offers the lowest interest rate, resulting in the lowest monthly EMI and total repayment amount, even though the processing fee is slightly higher. By comparing these details, you can choose the loan that saves you the most money over time.

Remember, always read the terms and conditions carefully and ensure that the loan fits your repayment capacity.

3. Apply For The Loan and Get Approved

Applying for a personal loan is a straightforward process that can help you manage financial needs like consolidating credit card debt. Here is how you can apply:

• Choose a Lender: Select a bank or financial institution that offers personal loans with favorable terms.
  
  
• Check Eligibility: Ensure you meet the lender's criteria, which typically include age, income, employment status, and credit score.
  
  
• Gather Documents: Prepare necessary documents such as proof of identity (e.g., Aadhaar card), address proof, income proof (e.g., salary slips, bank statements), and employment details.
  
  
• Fill Out Application: Complete the loan application form with accurate personal and financial information.
  
  
• Submit Application: Submit the application along with the required documents either online through the lender's website or by visiting a branch.
  
  
• Await Approval: The lender will review your application, verify the information, and assess your creditworthiness.
  
  
• Receive Funds: Upon approval, the loan amount will be disbursed to your bank account, usually within a few days.

Example: Swati's Experience

Swati, a 28-year-old from Bengaluru, had ₹80,000 in credit card debt with a 24% annual interest rate. To reduce her interest burden, she decided to apply for a personal loan.

She visited her chosen bank's website and selected a loan amount of ₹80,000 with a 24-month tenure. She filled in her personal and employment details and uploaded necessary documents like her Aadhaar card and salary slips. After submitting the application, the bank reviewed her information and approved the loan. The funds were disbursed to her account within 48 hours.

With the personal loan, Swati paid off her credit card debt. Now, she pays a monthly EMI of ₹3,800 at a 12% interest rate, saving significantly on interest payments.

By following these steps, you can apply for a personal loan to manage your financial needs effectively.

4. Pay Off Your Credit Card Bills

Using a personal loan to pay off your credit card bills can help you save on interest and simplify your finances. Credit cards often have high interest rates, sometimes up to 45% annually, while personal loans typically offer lower rates, ranging from 11.5% to 24%. By consolidating your credit card debts into a single personal loan, you can reduce the total interest paid and have a clear repayment plan.

Here is an example:

By taking a personal loan of ₹1,00,000 at an annual interest rate of 12% for 24 months, your new monthly EMI would be approximately ₹4,707. Over two years, you would pay about ₹12,968 in interest, which is significantly less than the ₹27,000 you would have paid with your credit cards.

This approach not only reduces your interest burden but also streamlines your payments into a single, manageable EMI.

5. Make Payments on the Personal Loan

After obtaining a personal loan to pay off your credit card debts, it is crucial to make regular monthly payments (EMIs) on time. This helps you avoid late fees, maintain a good credit score, and ensures you are on track to becoming debt-free.

Here is an example of a personal loan repayment schedule:

In this schedule, the EMI remains constant at ₹4,707 each month. Initially, a larger portion of the EMI goes towards interest, but over time, the principal component increases while the interest decreases. By consistently making these payments, you will fully repay the loan by the end of the 24-month term.

Staying disciplined with your EMI payments ensures financial stability and helps you avoid additional debt.

Benefits Of Using A Personal Loan For Credit Card Debt

1. Potential For Lower Interest Rates

Using a personal loan to pay off credit card debt can save you money because personal loans often have lower interest rates than credit cards. This means you pay less in interest over time. 

Here is a simple example:

In this example, using a personal loan helps you pay off the debt faster and saves ₹25,000 in interest.

2. Consolidated Debt

Using a personal loan to pay off multiple credit card debts can make managing your money easier. Instead of remembering different due dates and amounts, you have just one loan to focus on. This helps you stay organized and avoid missing payments. 

Here is a simple example:

In this example, consolidating debts into one personal loan reduces the number of payments, lowers the interest rate, and simplifies your monthly budgeting.

3. Improved Credit Score

Paying off credit card debt with a personal loan can help improve your credit score over time. Here is how:

1. Lower Credit Utilisation: Credit utilisation is the percentage of your available credit that you are using. High utilisation can negatively impact your credit score. By paying off credit card balances with a personal loan, you reduce your credit utilisation, which can lead to a higher credit score.
   
   
2. Improved Payment History: Making timely payments on your personal loan demonstrates responsible credit behavior, which positively affects your credit score. Payment history is a significant factor in credit scoring models.
   
   
3. Diversified Credit Mix: Having a mix of different types of credit accounts, such as credit cards and installment loans like personal loans, can benefit your credit score. It shows lenders you can manage various types of credit responsibly.

Here is a simple example:

In this example, using a personal loan to pay off credit card debt reduces credit utilisation, maintains a positive payment history, and diversifies the credit mix, leading to an improved credit score.

Considerations

When considering using a personal loan to consolidate your credit card debt, it is essential to understand the key factors involved. This approach can simplify your finances, but it is important to proceed thoughtfully to ensure it benefits your financial health.

1. Debt Limits

Before consolidating, assess the total amount of debt you plan to combine. Ensure that the new loan does not exceed your borrowing capacity. Overextending yourself can lead to financial strain and may impact your ability to make timely payments.

2. Loan Terms

Carefully review the terms of the personal loan:

• Interest Rates: Compare the loan's interest rate with those of your existing debts.
  
  
• Repayment Schedule: Understand the duration and frequency of payments.
  
  
• Fees: Be aware of any origination fees or prepayment penalties that could affect the overall cost.

A thorough understanding of these terms will help you determine if the loan is a cost-effective solution.

3. Credit Score

Your credit score plays a significant role in the loan approval process and the interest rate offered. A higher score can lead to more favorable terms. Before applying, check your credit report for accuracy and consider improving your score by paying down existing debts and making timely payments.​

4. Long-Term Financial Health

Consolidating debt is a step toward financial stability, but it is crucial to address the behaviors that led to the debt. Developing healthy spending habits, creating a budget, and prioritising debt repayment are essential to avoid falling back into debt. Consider seeking financial counseling if needed to build a sustainable financial plan.

Example: Comparing Credit Card Debt vs. Personal Loan Consolidation

In this example, consolidating credit card debt into a personal loan reduces the monthly payment and total interest paid, making debt repayment more manageable.

Also Read - How to Use a Personal Loan to Pay Off Credit Card Debt

By carefully considering these factors, you can make an informed decision about using a personal loan for debt consolidation, setting the stage for improved financial well-being.

Conclusion

Using a personal loan to pay off credit card debt can be a smart move if done carefully. It helps by lowering interest rates, making payments easier with just one EMI, and improving your credit score over time. However, it is important to compare loan offers, check your eligibility, and make sure you can afford the new payments. Avoid using your credit cards again while repaying the loan, or you could end up in more debt. 

Plan your finances well, stick to the repayment schedule, and focus on staying debt-free. If used wisely, a personal loan can help you save money and reduce stress, giving you a fresh start with your finances.

FAQs

1. Can a personal loan help reduce my credit card debt?

Yes, a personal loan can lower your interest rate and make payments easier by combining multiple debts into one.

2. How do I choose the best personal loan for debt consolidation?

Compare interest rates, fees, and repayment terms from different lenders to find the cheapest option.

3. Will taking a personal loan affect my credit score?

It may dip slightly at first, but timely repayments can improve your score over time.

4. What should I avoid after using a personal loan to pay off credit cards?

Avoid using credit cards again, or you may end up with even more debt.

5. How long does it take to repay a personal loan for debt consolidation?

It depends on the loan term, usually 1 to 5 years, but paying early saves interest.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?